WE ARE ALL THIRD WAY NOW:

Paying for Old Age (HENRY T. C. HU and TERRANCE ODEAN, 2/25/11, NY Times)

The insurance industry sells an inflation-adjusted annuity that goes part of the way toward helping people cope with the possibility of outliving their savings. During your working years or at the time of retirement, you can pay a premium to an insurance company in exchange for the promise that the company will pay you a fixed annual income, adjusted for inflation, until you die.

But in a world in which A.I.G. had an excellent rating only days before it became a ward of the state, how can someone — particularly a young person — know for sure which insurance companies will be solvent half a century from now? Annuities aren’t federally guaranteed. The only backstops are state-based systems, and the current protection ceilings are sometimes modest. If an insurance company goes under, the retiree may end up with nothing close to what was promised.

The federal government can offer a product that solves that problem. Individuals would face no more risk of default than that associated with Treasury bills and other obligations backed by the United States.

Here’s how it would work. Initially, people who wanted to buy this insurance would enroll through one of the qualified retirement savings plans already offered to the public, like a 401(k) plan, and could choose this annuity option instead of, or in addition to, investments in stocks, bonds or mutual funds.

How much the payouts would be could be based on a variety of factors, including interest rates on government bonds; mortality tables that, among other things, take into account that healthier people are more likely to buy annuities; and administrative costs. This new product wouldn’t cost the government a penny. In fact, the Treasury would benefit. It is only an incremental move beyond issuing inflation-adjusted bonds, which the Treasury already does. By allowing the government to tap a new class of investors, the cost of government borrowing over all would probably drop.